Accelerating digitisation of trade finance industry

Technology is bringing changes in the logistics, nature of products, products delivery channels and documentation process in trade and trade services. A number of participants ranging from shipping company, freight forwarder, local delivery agents, banks, exporters, insurance company and banks and other financial institutions are taking part in the transaction process. Each participant in the entire trade cycle gain competitive edge through process sophistication with the help of advanced technological development. In regard to trade finance, according to a survey of the International Chamber of Commerce (ICC), there have been some digital evolutions in trade finance that include detailed management dashboards, reporting capabilities and automated document preparation. The elimination of paper from trade finance transaction processing could reduce throughput time by two hours per transaction, and the judicious application of technology to compliance-related processes and procedures could conservatively reduce compliance costs by 30 per cent or more in the trade and banking business, as observed by ICC. Technologies are available for more widespread 'dematerialised documentation.' However, simply the process of converting paper documents into an image and passing it on to banks is in fact not digitisation. The real digitisation enables data extraction and analyses, with the aim of improving business processing.

In recent times, introducing of technologies such as-- block-chain, distributed ledgers technology, smart contracts, cloud computing, big data, machine-based learning and artificial intelligence etc pushed the global banks to create consortium among themselves as well as  Fin-Tech companies. Currently some are developing an open account trade finance platform powered by distributed ledger technology. The aim is to simplify trade, improve visibility into trade flows, reduce operational costs, and provide better access to credit and risk mitigation services throughout the supply chain life cycle.

The ICC Banking Commission has launched a working group to coordinate all works relating to the digitisation of trade finance. The group aims to help the trade finance industry accelerate its progress towards greater digitisation. As a part of the mandate, ICC is going to revisit e-compatibility of ICC rules for trade finance; and as part of that Revision for eUCP and eURC is under process. Beginning in 2017, the draft effort stalled at the ICC Banking Commission after National Committee members expressed concerns, ICC's Digitisation Working Group formally requested a mandate from the Executive Committee, and in January 2018, the ICC Banking Commission Executive Committee announced that it would proceed with updating the existing eUCP rules and drafting new rules addressing electronic presentation for collections (eURC).

Along with the growing use of technology, several newer challenges are coming up in the area of trade and trade services. The perception of a shortfall of trade finance globally has become stronger and SMEs have been facing rejection of trade finance proposals or applications in increasing rates. The ADB estimated demand and rejection rates of different regions and identified that unmet demand is the highest in Asia and the Pacific, and Africa and the Middle East. Another key challenge to the traders/clients is the huge information gap about the products and processes. Even within traditional bank products, companies reported limited familiarity with relatively established products.

It is recognised that international trade and the processes and systems that support it, are vulnerable to financial crimes. Several instances of document rejection and court injunctions are there. Still there are practices of offering spurious discrepancies in documents presented under LC to delay payment or cause obstruction.  Trade-based money laundering is a critical area of malpractice which can be practised through the misrepresentation of the price, quantity or quality of imports or exports, and the techniques involved are: over and under-invoicing of goods and services; multiple invoicing of goods and services; over and under-shipments of goods and services; falsely described goods and services etc. Despite a significant proportion of international trade being conducted on open account terms, firms' trade-based money laundering typically focus on transactions supported by traditional trade financing, such as LC; and this is disproportionate and leaves a gap in the industry's response to Trade Based Money Laundering (TBML).

Increasing compliance requirement has been pulling the overall costs of offering trade services in all global economies. The most recent ICC survey identified that capital adequacy requirements have made trade finance business more expensive and translated directly into balance sheet constraints on businesses, which compound constraints related to risk appetite. Regulatory requirements designed to mitigate the risk of financial crimes have resulted in unintended consequences, particularly in emerging markets.

Price verification for financial crime control purposes is another difficult challenge. Financial Institutions generally are not in a position to make meaningful determinations about the legitimacy of unit pricing due to lack of relevant business information. Further, many products are not traded in public markets and there are no publicly available market prices. Even where goods are publicly traded, the current prices may not reflect the agreed price used in any contract of sale or purchase. It is well-known that the correspondent banking is being threatened by an overzealous interpretation and enforcement of rules aimed at preventing money-laundering and starving terrorists of funds. The impact of the de-risking has now been rebounded to some extent, as the Word Bank, IMF etc are now working almost on same tune to redefine correspondent banking business with an expectation to bridge the gap between uncertainty in regulator expectation and compliance programme of global correspondent banks.

The banking landscape has changed significantly over the past decades. The breadth and scale of regulatory reform has arguably contributed to the rise in shadow banking, or market-based finance. The last decade in particular has seen a rise in Fin-Techs entering the market and partnering with some of the arguably more forward looking traditional financial institutions in a bid to revolutionise traditional finance practices, including trade and supply chain finance. There is a view regarding the potential benefits to non-bank providers of trade finance and supply-chain finance, of having a nascent and far less stringent or mature regulatory framework to deal with than incumbent banks active in the financing of international trade. The entry of non-banks and the rise of 'shadow banking' are indicating towards possible danger of lax regulation. Leveling the playing field non-banks may have been attracted to the market as a result of the comparatively reduced regulation surrounding their activities, but in order to achieve a level playing field, regulation may be exactly what is required by the regulators. Offshore activities remained a shadow area where right kind of regulatory arrangement is yet to be built to address the alleged money laundering and tax evasion.

Dr Shah Md Ahsan Habib is Professor and Director (Training), Bangladesh Institute of Bank Management (BIBM). [email protected]